Selling things for a living is hard work. You’re only as good as your last hit. And sometimes second best doesn’t get you much. It’s like the sales contest in Mamet’s Glengarry Glen Ross: “As you all know, first prize is a Cadillac Eldorado. Anyone want to see second prize? Second prize is a set of steak knives. Third prize is you’re fired.”

Selling aircraft is particularly tough, but it really depends more on the product and less on the sales technique. ILFC’s Steven Udvar-Hazy, easily one of the most powerful men in aviation, cast serious doubt about Airbus’s A350 at this year’s ISTAT conference. After John Leahy gave a vigorously optimistic review of Airbus’s widebody products, Udvar-Hazy praised the latest A350 incarnation, then damned it with a “silver medal” compared with the 787’s gold. GECAS’s Henry Hubschman then endorsed Udvar-Hazy’s message. This means that any airline management team that selects the A350 has to explain to their board why, exactly, they chose a plane that the smart money regards as a runner-up.

Udvar-Hazy confirmed that the middle market is where the action is, and he implied this looked like a winner-take-most market. A runner-up plane gets a 25% market share (Udvar-Hazy’s figure) and weak pricing. That’s the aviation equivalent of a set of steak knives.

And so far, that’s reality. While the A350 numbers aren’t bad, it has yet to garner a serious blue chip airline customer (TAM, Finnair, and USAirways are the quality buyers here). That vaunted Qatar order (not blue chip, but at least big) hasn’t been signed. The 787 has swept Asia, including India and Australia. Just as important, numerous blue chip airlines are set to place an order for a mid market jet this year, including BA, Emirates, Lufthansa, and Singapore. What if they all go with the 787?

Couple the A350’s weakness with the likely demise of the A340 (that’s Udvar-Hazy’s view, confirmed by an Emirates deferral just after ISTAT) and you have a potentially catastrophic situation. After 2008 (Udvar-Hazy’s possible year for the A340’s demise), Airbus’s only presence in the 200-550 seat range will be just one plane. A runner-up plane.

The good news is that Airbus has a way forward. Udvar-Hazy recommended a family of middle market planes that leapfrog Boeing’s 777 and 787 (a strategy backed by a faction within Airbus). He also said he wants to see a commitment to this family by Farnborough. From the audience, that sounded vaguely to me like an ultimatum.

Selling planes isn’t like selling computers or stereos. If the market rejects a new consumer product, it’s easy to kill it and come up with something they’ll like. With aircraft, you get one or two shots a decade. Airbus’s hubristic A380 launch in 2000 is only now starting to negatively impact their future. (If you think Teal’s A380 forecasts are harsh, they’re generous and buoyant compared with Udvar-Hazy’s “300-400 at best” comment. He also correctly identified the A380 launch as the cause of Airbus’s mid-market woes.)

Any correct decision Airbus made now would only bring rewards after 2012, but it might be well worth it. European firms are supposed to be better at long-term thinking. Now would be a smart time for Airbus to start an all-new widebody family to compete against both the 777 and 787 in the next decade. The 777 looks great today, but in ten years it would be vulnerable. A new family of planes to compete with the 787/777 would benefit from composites experience learned with both the 787 and A400M; Airbus could even advertise the new planes as superior second-generation composite jetliners. They could give priority to the 250-seat A330/350 replacement, with the larger A340 replacement arriving a year or two after.

Drawbacks: a new Airbus family would cost $3-5 billion more than the current A350. That may be difficult when EADS needs to attract more public investors as Daimler Chrysler and Lagardere reduce their stakes in the company. Abandoning the current A350 means leaving Boeing alone in that segment for at least five years. It would also delay any A320 follow-on necessary to respond to a 737 follow-on, potentially hurting Airbus’s important narrowbody revenue stream. And a massive course change would hurt Airbus’s credibility in the eyes of customers.

This is serious stuff. But it beats relying on CannibalAir to rescue your 200-550 seat market standing (“We have met with your A350 salesman; he was delicious. Send another for further consultation.”). That’s a recipe for a slow, steady decline.

All of this assumes that Boeing gets it right with the 787. That remains a considerable risk. But what’s the worst-case scenario? Given the production volume that looks likely, it will be tough for them to not make cash. Boeing’s worst ever technical hiccup would mean only a 6-12 month delay—painful, but not enough to help Airbus. The only real problem would be performance or operating economics shortfalls. There’s certainly risk there. But banking on the other guy’s failure is a strategy for defeat.

For years Airbus dismissed critics of its widebody product strategy as being in Boeing’s pocket. And now Airbus has exactly Two Options. One: “We made mistakes, and are now paying for them. This will take hard work, and we will lose business in the short run but we will embark upon a new product development strategy that ultimately will return us to market strength. We’ll be back!” Option Two: “Steve Udvar-Hazy? He’s in Boeing’s pocket.”

We’ve updated the A340 this month, along with the V-22, T-45, F-15, Gripen, Eurofighter, Challenger/Global Express, Mirage 2000, and P-3. And there’s a new Business Jet Overview. Enjoy spring.